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Change how you think about your finances: takeaways from “the psychology of money”

Hey guys! So recently I read the book The Psychology of Money (which I also mentioned some in this post). It was such a fascinating read and I highly recommend that you read it! Maybe you’re not into “boring finance books” but it was anything but boring and knowing how to better manage your finances is empowering! And honestly from all your feedback you’ve been giving on blog posts and stories regarding finances, I think it’s safe to say that you guys will really like the book. So with all that said, today I just wanted to share some big takeaways with you from the book!

Why is having money so important to most of us? This is something the book touched on in the beginning and it’s not necessarily because of the tangible things money can buy, but rather intangibly what it buys you. Having money gives you independence. It gives you freedom to do what you want, when you want, for as long as you want. You hate your boss and want to get a new job? If you have money (saved), you can leave your job and not feel pressure to take the very next job offered. You’re sick or injured and have to take time off work? You don’t have to stress about if you can pay your bills. And sure, being able to vacation, buy a nice house, etc. are all great and I would be lying if I said that money didn’t matter in those ways. But, overall money gives you peace of mind, which is worth so much more than anything you can actually buy.

So now that we know why money and being financially stable is so important, I want to talk about some of the biggest takeaways I had from the book. These are all just random thoughts that may help you see your finances from a different perspective!

One of the reoccurring themes of the book drives home the point that wealth isn’t actually what you see, but rather but you don’t see. This mantra is something that the book mentions repeatedly and is definitely worth re-mentioning. It’s the purchases that people do not make that can determine wealth. When I first read this and its explanation, I was like wow, that is really powerful. It was something that I never thought of before. This isn’t to say that people who own nice things aren’t actually wealthy but it reminds us that just because someone has a nice house, car, etc. doesn’t really tell us anything about their finances. Sure, they could be very wealthy and have no problem affording XYZ, or they could be living way above their means when making these purchases. At the end of the day, we don’t really know what’s in someone’s bank account.

Wealth is not what you see, but rather what you don’t see. It’s what people choose not to buy that in turn creates wealth.

Two examples of this. My parents could afford to buy any luxury car they wanted in cash, and not feel financially effected. But they have just always chosen to drive (new) Mazdas, Toyotas, etc. It’s through deferring more expensive purchases in some areas that can help you build wealth overtime. Another example I think of is when Stephen and I almost bought the Lexus, but chose to get the Mazda. On the outside, you may think, someone bought the Mazda because they couldn’t afford the Lexus, and whoever is driving the Lexus is wealthier. When it reality, even though we could have bought the Lexus and it may have looked a certain way from an outside perspective, we chose to save ($30K+!!), which is the smarter financial decision and a better way to build wealth overtime.

Now this isn’t to sh*t n anyone who chooses to buy nice things (also nice is a very relative term but you know what I’m saying lol). I mean, I love that we “upgraded” our house, that I buy an occasional designer bag, etc. And I do believe that we should treat ourselves to certain things because what’s the point of working hard if you can’t do/buy things you enjoy? But the whole point in book is that having “nice” things does not necessarily prove wealth. In fact, choosing what to buy, or rather not buy, is what can help you accumulate wealth over time and determine what is actually in your bank account.

Speaking of proving things, there is another observation that the book makes which I think we can all be guilty of. It’s buying certain things because we think that people will perceive us differently as a result.

Care less what other think, and you’ll save more.

Now, I like to think I’m someone who doesn’t care what others think and yeah, there is a large part of me that genuinely knows that’s true. However, at the end the day we’re all human. I think we would be lying to ourselves if we said that we’ve never been influenced to buy or do something because we thought it would make others see us in a different (better) light. I know this can be hard especially with (having a job on) social media. There is a certain pressure to have things look a certain way. But at the end the day, if we care less about what others think, we’re probably prone to saving more (or waiting to purchase things when it feels best financially) vs. rushing into purchases to try and prove something. And for whatever it’s worth, the book was saying usually when we see someone driving a nice car for example, we think of “what would people think if they saw me in that car?” vs. us thinking highly of the other person. The reality is, we are more concerned with our own possessions than anyone else is 😉

Okay, so changing gears a little bit. When it comes to saving money, a lot of times we are programmed to save whenever we need or want something. A house, car, vacation, new camera, etc. And while in recent years I’ve grown more accustomed to saving for financial security, I tended to look at my savings as “as long as I have 6 months of expenses saved it’s fine, I can spend.” And while this is true to a certain extent, this book made me rethink this.

You don’t need a reason to save.

It made me realize that while having certain parameters in place is super helpful when it comes to saving vs. spending (6 months expenses saved, money being set aside for retirement, etc). Just because I’m hitting those milestones doesn’t mean I need to spend what’s left. I can save it just to save it. There doesn’t need to be a reason (ie. a car, house, retirement, etc) behind it. It can be that while I can save extra I should because there may be a time when I’m not able to save as much, etc.

In regarding the best way to save, and how to accumulate wealth, the book I’m currently reading MONEY Master the Game talks a lot about this in specifics (definitely would recommend reading), but The Psychology of Money still talks about how building wealth is a long game.

Patience over Greed. Accumulating wealth is all about compounding over time.

I’m not going to get into compounding a lot here, but it’s the main principle that financial experts preach time and time again; if you let your money compound (year after year) it works wonders. Basically, the sooner you start investing (we have our money in the S&P 500; not here to give specific financial advice but just sharing what we do) the more time your money has to compound. If you’re unfamiliar with how compounding works, I thought this article did a good job explaining. But point being, we live in a world of instant gratification so it can be hard to be patient. But the book is a good reminder that with patience, we can all accumulate wealth over time.

The last thing I wanted to touch on is the wealth gap and how it’s changed over the years.

In the 1950s the “bottom” and “top 1%” lived very similar. It was very hard to tell by what people owned, who made more money or was considered wealthy.

I won’t bore you with the details (also because I’d probably recall them inaccurately lol) but the book describes in detail how and why the wealth gap has widened over the years. In the 1950s, regardless of how much money you made, your assets like your house, car, etc. were pretty similar to your peers. So yes, what was in your bank account was different but as far as physical items you owned there wasn’t this huge disparity. That has naturally widened over the years but it is has also become more apparent now because of things like social media. If you think about it, the only reason you really know what other people have (outside of your close friends) is because what people can show on social.

Like, I think back to when I was in elementary and middle school. It didn’t really occur to me that other people had more or less than we did. I mean sure, you know that not everyone has the same living situations, but when you’re younger and you aren’t seeing other peoples lives on social media, you don’t compare your living situation to what it “could” be. Now with social media, you see what everyone has and it can make you feel like you don’t have enough or you aren’t doing enough. But this goes back to the reminder that wealth is not what you see, but it’s what you don’t see. At the end of the day, you don’t know what someone’s actual financial situation is! And just because someone else has XYZ doesn’t mean you also need it to be happy.

Something my dad has always said to me is: money doesn’t make you happy, but it sure does make things easier. I think that sentiment really hits close to home and is a good reminder of why being financially secure is important. As the book states, it’s not because having money can necessarily buy you happiness, because we all know that isn’t true. But it can buy you some peace of mind in a lot of different ways, which again, is worth way more than anything tangible money can buy you. At the end of the day, we all want to do what we want, when we want, for as long as we want, and that largely comes from financial stability 🙂

does one of your girlfriends need to hear this? Share away…

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